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Monday, April 29, 2013

Some countries in the Eurozone (notably Germany) are still holding their water and perhaps even swimming up the stream. Other countries (notably Greece) are going down the drain. Obviously a trend which cannot go on forever.

Some countries seem intent to punish the South; others seem intent on accusing the North of a crime. Guilt is being assigned all over the place.

Against this background, it is surprising that the issue of 'product liability' has not come up yet. The Eurozone was a 'product' developed and implemented by the EU. Was due diligence, or rather: were crash tests made before putting the product on the market? If not, who carries responsibility for the malfunctioning of the product? For the damages which it has caused?

Clearly, the Eurozone was implemented based on unanimous approval of all member countries. At the same time, it is clear that not all member countries had (or intended to have) a real say in it. If I recall correctly, particularly two heads of government were supremely self-confident of their supreme intelligence (Valerie Giscard d'Estaing and Helmut Schmidt) and they drove the process. Call it simply Germany and France. Did Germany and France act responsibly? Did they responsibly address all risks which were pointed out?

I am not talking about critics/warners like Milton Friedman, Ralf Dahrendorf, individual economists or journalists. No, they might have been accused of having other motives than the establishment of a potential new reserve currency; perhaps a threat to the US dollar. Instead, I am talking about the EU itself.

I am talking about the Delors Commission headed by Jacques Delors. Delors and his Commissioners are considered the 'founding fathers' of the Euro. They issued, in 1989, the Delors Report which set out the road map for creating the common currency. It was that report which stated that 'if sufficient consideration were not given to regional imbalances, the economic union would be faced with grave economic and political risks'. It was that report which prophesized all the damages which we now know and which could only have been avoided if the recommendations of the Delors Report had been fully implemented.

Why weren't they implemented? Karl-Otto Pöhl, then the President of the Bundesbank, said that 'when the report was formulated, I did not think that a monetary
union would become reality in the foreseeable future. I thought perhaps
sometime in the next hundred years. I thought it was improbable that
other European countries would simply accept the model of the
Bundesbank'.In an interview of 2011, Jacques Delors said that 'I’m worried and I have regrets. I especially regret that when the euro
became operational, during the decision-making in 1997, they rejected my
idea for an Economic Policy Coordination Pact alongside the Stability
and Growth Pact'.

What could such an Economic Policy Coordination Pact have achieved? Well, it could have monitored a bit more than the two principal Maastricht-criteria (maximum deficit of 3% and maximum debt of 60%). To monitor only those two criteria is based on the fallacy that an economy consists only of the fiscal sector.

An Economic Policy Coordination Pact could have monitored the cross-border flow of capital; the level of cross-border debt; the level of current account balances; the development of regional manufacturing/industrialization; etc. etc. In short, it could have monitored all those factors which, having been ignored, caused most of today's problems.

Of all people, it is now Prof. Hans-Werner Sinn who is changing his tune. In a recent interview he argued that, in order to restore competitiveness, the South must deflate AND the North must inflate (so far, I have heard him talk only about the South having to deflate). He is now saying that, relative to the average, a country like Greece must become 20-30% cheaper AND a country like Germany must become 20% more expensive. Now that is a break with his past!

Still, I would challenge Prof. Sinn to show only one period since WW2 where inflation in the South, on a sustained basis, was significantly less than in the North. If never, why should that happen now? Personally, I don't think that I will live to see that happening if it is left up to free market forces.

However, an Economic Policy Coordination Pact could still achieve progress even today. The Eurozone countries could, for example, agree to set governmental incentives so that the North/South flow of products, services, capital and investment is brought into balance, if not even turned around a bit.

Cross-border debt is the result of one-sided cross-border flows of products and services. If the cross-border flow of products and services were in balance, there would be no cross-border debt. It is just as simple as that!

Now, to bring the North/South flow of products and services in balance might well result in somewhat lesser growth in the North. Why should an egotistical/nationalistic North agree to any such damage? For one very simple reason: that damage will be next to nothing compared to the damage which will occur otherwise. Will it occur for sure? Perhaps not for sure, but in order for it not to occur, someone will first have to rewrite the rules of mathematics.

If the Eurozone were to blow up, some countries are likely to pursue the issue of product liablity. And they would have a very legitimate case for doing so!

Saturday, April 27, 2013

One of the first books I had to read upon entering College in 1968 was "Society and Democracy in Germany" by Prof. Ralf Dahrendorf (later Lord Dahrendorf). Ever since then have I been an admirer of this outstanding proponent of true liberal thought. To me, in the same legion as Friedrich von Hayek and Karl Popper.

The common currency project drills the countries to German behavior, but not all countries want to behave like Germans do. For Italy, periodic devaluations are much more useful than a fixed exchange rate and for France, higher government expenditures are more meaningful than a rigid adherence to stability criteria (which are, above all, an advantage for Germany).Yes, France and Italy go along with German demands if for no other reason than national pride. However, the price for that is very high and it could soon become apparent that it is too high - psychologically, politically and economically.Is Germany tempted to exercise some form of benevolent hegemony? Well, that is a good expression. Naturally, it can be considered as progress if Germany does that through the Bundesbank and not through military might.The idea of a common currency union is a big mistake, an adventurous, reckless and mistaken goal which will will not unite Europe but, instead, divide it.

Prof. Dahrendorf also says in the interview that "I am sometimes tempted to form a private group which devotes its thinking to a Europe without a common currency union". I wish he had done that!

Friday, April 26, 2013

This is an interesting article about Alekos Alavanos who has recently formed the 'Plan B' Party. I have not read about Alekos Alavanos before. Going by the content of the article, I agree that he might be hitting a nerve, a nerve which is not only a nerve in Greece and in the periphery but also in Northern countries.

I take it Alekos Alavanos is a Communist. So much more is it interesting that his arguments are very similar to those of the newly-formed German party 'Alternative für Deutschland' (AfD), which is described as a center-right movement.

If I understand the arguments of Alavanos and AfD correctly, they are: the Euro is not only damaging the overall economy of the Eurozone but essentially destroying the economies of some countries altogether; the Euro is creating enormous political divisions between North and South; and, finally, the Euro is, again, making Germans the most hated people in Europe. If these trends are not corrected, they will lead to disaster.

Personally, I still think these trends could be corrected through policies which aim at re-balancing the flow of products, services and investments within the Eurozone but to this date I see not a single EU politician taking steps in that direction. Without such steps, Alavanos and AfD may very well turn out to be successful.

Thursday, April 25, 2013

It is mandatory when we are out West to visit Lia, northwest of Ionnina near the Albanian border; once referred to as 'Epirus' most famous hamlet' in a newspaper article.

Some of my favorite readings are epic novels set against the background of a civil war. I guess the favorites are Gone with the Wind, For Whom the Bell Tolls, Dr. Shivago and Eleni. If I had to pick one of them as the super-favorite, I would pick Eleni.

As one leaves the Ioannina-Igoumenitsa road and crosses the river towards the North, one enters a different world. It is a world of more or less isolated (and now partially deserted) mountain villages connected by an asphalt road and electricity poles where only a few decades ago life was like in the Middle Ages. Lia is close the Albanian border; somewhat 'close to the end of the world'.

The village appears almost unpopulated today but if one has read the book, one can easily picture a few hundred villagers populating perhaps 100 or more stone huts and communicating via mountain paths. The vertical distance between the upper and lower village is such that the villagers must have covered the height of Mt. Everest every few months. The nearest road was almost 40 Km away.

We drive up the Eleni Gatzoyiannis Road to the house where the family had lived and which was rebuilt by Eleni's granddaugther 10 years ago. Not a soul to be seen. Everything extremely peaceful. A marvellous sight across the valley towards the mountain ranges. 70 years ago, this had been the place of brutal happenings. One is awed to think of that in the presence of today's peace.

We do find an old man a couple of houses away. He is 80 and one can tell his age. He remembers Eleni from his childhood and he has visited his childhood friend Nicolas Gage three or four times in America. Only last January had he returned from the US. Nicolas Gage had invited him to live with them but he preferred to come back to Lia. My wife asks him why he would have come back here where he is all alone and up to himself. He tells my wife 'because it's my home'.

A few men are sitting outside the small hotel and drinking coffee. There seem to be no guests at the hotel but the lady who runs it is as friendly as ever. Once again, a quick look at all the memorabilia of Eleni which are exhibited in the hotel and then on to Igoumenitsa.

The narrow road is winding through the mountains. One gets an eerie feeling driving through totally unpopulated areas without a building or anything else in sight. About 40 Km later we get to Filiates. That was the place where the road ended back in Eleni's days. That's how far the villagers had to walk if they wanted to get to the next closest city.

Once at Filiates, the 'different world' of the mountain villages is behind us.

Wednesday, April 24, 2013

Last year I only travelled, alone, through Konitsa. This time I wanted to visit the city with my wife. I had read much about Konitsa when reading about the Greek civil war. To me, one of the milestones took place there because if ELAS had succeeded in taking the city around year-end 1948, things might have turned out differently. ELAS had never managed to get control of a city as a place for a shadow government. Konitsa seemed, to me, to have been their best chance. 'General Markos' (Markos Vafiadis), to me the brain behind ELAS, had gathered around 2.000 fighters on the hills surrounding Konitsa. Why they would not have succeeded in taking the then village, launching a surprise attack between Christmas and New Year's, was a mystery to me.

The trip from Ioannina to Konitsa was eventful only in the sense that I was running low on gas. I have the habit of never refilling the tank too early. Quite frequently, this leads to a situation where I face the risk of finding a gas station too late. This time would be different because I calculated that I would easily make it to Kalpaki where I would fill up the tank.

I passed through Kalpaki and found a somewhat deserted small gas station on the way out of town. That was the place where I would stop because, I felt, they would appreciate the business. An old man, stumbling a bit due to a stiff leg, made his way to the pump. It didn't work. 'No electricity', he said. 'That figures', I said to my wife; 'he probably didn't pay his last bill'. A few Km further on there was a large Shell station. I figured they would have paid their last electricity bill. And yet, they had no electricity, either.

Now, blood pressure started rising. If this was some kind of a regional black-out, would I still make it to Konitsa to fill up the tank there? What if we ran out of gas in the middle of nowhere? Well, we made it to Konitsa but there was no electricity at the gas station there, either; neither in the whole city!

I ask the owner of the station how long he has been out of electricity and he says about half an hour. I ask when electricity will come back and he says in about half an hour. What would he tell me in half an hour if electricity had not come back? He says he would tell me to wait another half an hour.

To make a long story short, it took another 2-1/2 hours for electricity to return to Konitsa. That literally forced us to get to know the city. What an interesting place! An obviously very, very old city where most of the buildings in the center have been rebuilt in their original character. However, there are buildings here or there which look like they haven't changed since the civil war.

A bustling little place. Small shops, cafes, people moving around, etc. I am looking around and wonder why no one seems excited about the fact that the town is out of electricity. Life goes on as though nothing happened. Am I, the retiree/tourist without time pressure, the only one who feels under time pressure? I keep asking people for exact predictions when electricity will come back. They all seem to be convinced that it will take 'another half an hour'.

We follow the signs leading to the ruins of a former Turkish mansion. By golly, Turkish rulers seem to have known how to live well and how to build their mansions in the most attractive locations!

In the cafe, I order an ouzo and am surprised that they serve it with fresh ice cubes. How can that be when the electricity has been down for some time? My wife expresses concern that all the ice cream in the freezer will melt. She is told not to worry about that. The nearby supermarket is dark but somehow people are still shopping there and paying for their purchases. Life is unbelievably normal despite the black-out.

My wife strikes up a conversation with a Greek sitting at the table next to us who is nursing a beer. He is 68 and retired. He has worked 45 years as a mechanic in a factory and was promised that his pension would be 1.650 Euros/month. It's now a little less than half that amount. The economic situation in the area is terrible. They have to use part of their pension to support their children. He says there is no money left for beer after the 15th of the month (well, maybe not quite because we are already past the 15th of the month...).

He says that the farmers in the region are being taken advantage of. They have to sell all their production to traders without knowing what the price would be. They only find out afterwards what the price was; and it is far too low. Why is it that way? That's obvious; 'because of the politicians!'

I ask him about the battle of Konitsa. He points me to the hills where the most brutal parts of the battle took place. He says that some of the figthers were burned alive. I ask who burned whom. His answer: 'brother against brother'.

At a nearby photo shop, the owner shows me pictures of Konitsa in the 1940s. Seemingly not much more than a hamlet. And yet, around 2.000 fighters could not take the city fighting from the top. Quite unbelievable!

Electricity returned; I filled up the tank and we drove on to the Zagorochoria. Aristi was the place I wanted to see again because of the beautiful Mountain Resort there. If one didn't know that it was located in the mountains of Epirus, one could have guessed that it was in Gstaad. Everything close to distinguished perfection!

A young man welcomes us and shows us around. He comes across as extremely well trained: he handles himself like a gentleman; well mannered; noticeably well educated. He tells me that an uncle of his has a large Greek restaurant near the State Opera in Vienna. My wife is hungry and orders something to eat. He organizes everything and serves the food. It couldn't look better (and my wife says that it couldn't taste better; something which she doesn't always say...).

While my wife is eating, she carries on the conversation with the young gentleman. He explains that he is a University-educated civil engineer who couldn't find a job. He has taken the job at the Mountain Resort because he cannot expect his parents to support him. Life will eventually get better.

Through the villages of the Zagorochoria we drove back to Ioannina. Our hotel there, the Gran Serai, has got to be one of the nicest hotels I know in Greece. The very pleasant staff was the same as the year before. Except, the year before, the hotel seemed very busy. This time around, there seemed to be only few other guests.

Monday, April 22, 2013

One difference was noticeable right away, though. The Εgnatia Odos, never a heavily travelled route to begin with, was essentially empty. It couldn't have been the tolls because, if anything, they seemed cheaper than the year before. Was there perhaps an economic crisis after all?

No economic crisis was visible at first glance in downtown Kozani. A vibrant city center with pulsating life. Cafes next to one another, full with mostly young people. Short-order places all over. However, my wife did not want a Mr. Wurst or a Burger-Boy for lunch. Instead, she wanted a regular small Greek restaurant or taverna. Not to be found in the center of Kozani! After asking about two or three people, we were ready to give up when, accidentally, we found a place in a small alley off the pedestrian zone.

We were the only guests. My wife was suspicious that the food would not be fresh. She engaged in a conversation with the owner while I nursed my beer.

Then I hear my wife ask something about 'the crisis' and I hear the owner's voice behind my back saying 'there is no crisis'. Suddenly, he has got my attention.

I turn around and see a young man (38 years old, he told us later) who could be the spitting image of Cristiano Ronaldo from Real Madrid: Posture straight like an arrow; dark hair cleanly brushed; face cleanly shaven; shoulders held back; chest moved forward; polite but self-confident expression in his face. A bit like the living version of an ancient Greek statue.

I ask him what he means by saying that there is no crisis. He repeats that he means that there is no crisis. No emotions whatsoever. Had I asked him the time of the day, he might not have reacted differently. I ask him about the fact that at least one out of four Greeks doesn't have a job. He says that that's because they don"t want to work.

I ask him what a young Greek who wants to work but cannot find a job should do. He points at the windows where I can see two or three people doing some painting etc. in the backyard. He tells me that those are Albanians working for 50 Euro/day. I tell him that that sounds a bit like sweat shop wages. He tells me that, with 20 working days, that adds up to 1.000 Euros per month which is a lot more than unemployment insurance. It's hard to argue with that.

I ask him why Greeks wouldn"t do that kind of work. His response: 'Because they are sitting in cafes. But, eventually, they will learn to work'.

I tell him that what he says sounds very hard, if not impassionate to me. He explains that he has been working 18 hours a day since the age of 15 doing every type of work available. With that, he saved enough to buy the restaurant. Business is slow these days but good enough for him, his wife and 2 children (a third on the way) to lead a satisfactory life.

I ask him what is needed in Greece and his response is: 'A right-wing government. Not Chrysi Avgi but a right-wing government'.

Meanwhile, the food was ready and his wife served it. She had prepared everything fresh. My wife was very happy. I nursed my beer and pondered what I had heard.

Thursday, April 18, 2013

"For the population of Greece there is only one possibility, namely, exiting (the Eurozone) as quickly as possible and become competitive. I would say Greece should have a return ticket. Greece should be able to return to the Eurozone at a depreciated exchange rate at a later point in time if they satisfy the entry conditions. That would give the population hope. It would not be expulsion out of the Eurozone. They could even legally remain part of the system. They would be in a sort of hospital for a while and then they would return to normal. This is the right strategy".

Prof. Sinn makes this statement based on two very simple assumptions: First, the kind of austerity which has become necessary as a result of staying in the Eurozone is simply not sustainable (he refers particularly to the unemployment situation). At the same time, if Greece stays in the Eurozone, that kind of austerity will have to continue for years to come. And, secondly, if deflating Greece doesn't work, one would have to inflate Germany & Co. Prof. Sinn says that Germany would have to inflate by 5,5% annually for 10 years to bring Greece back into balance. The possibility of that happening he rules out.

I have to admit that, with every passing day, it is getting harder and harder for me to support my position that Greece should stay in the Eurozone. I know that Greece can't make it with the Euro in its present structure but I also think that a Grexit would be the worst of all evils.

I herewith repeat my old argument: Greece should hold on to the Euro but simulate a situation, on a temporary basis, as though it had returned to the Drachma. That would entail, among others, special taxes on imports; special incentives for new domestic production and for exports; and - above all - special incentives for new foreign investment.

If one doesn't like that approach, then the next best solution to me would be the introduction of a new local (parallel) currency in addition to the Euro. Also on a temporary basis.

Why not a clear-cut Grexit altogether? That depends on one's vision of Greece's future. If one shares the vision, which I do, that Greece indeed has the chance to become a modernized economy with an adequate level of own value creation, then a Grexit would wipe out that vision. The last 3 years have shown that even with the greatest pressure on society, there is an enormous popular resistance to make the necessary reforms (cutting wages/salaries are not reforms, in my opinion). A Grexit would do away with all such pressures and the likelihood of Greece then making the necessary reforms voluntarily is close to zero, in my opinion.

I have friends who know Greece much better than I do and they keep telling my that my vision is not a vision but an illusion, instead. They say that Greece will never change. One of them says that 'I see insurmountable problems in Greece which can only be resolved by a return to the Drachma and a sole concentration on tourism, agriculture and shipping - together with an abandonment of true reforms across a myriad of professions (i. e. Greeks will never change) and with encouragement to enhance the acitivites in the three areas that I have mentioned'.

I have not (yet) accepted that logic but I have to admit that not doing so becomes more and more difficult with every passing day.

I love the phrase that 'the simple material expression of gratitude is not a bribe'. Apparently, it was originally meant to say that 'the simple material expression of gratitude with no monetary value is not a bribe' but some objected to the 4 simple words 'with no monetary value'.

What is not quite clear to me is whether this has indeed become the law or not. If yes, something which should go into the annals of humorous legislative tales has indeed turned into what can only be considered as an absolute scandal!

I recently came across the website of a company called Global Greece. When I looked up its address, I was surprised to find that it was located in a suburb of Thessaloniki, quite close to where we live. So yesterday, I knocked on their doors (without appointment) to see if I could talk to someone and learn about what they are doing.

Before I knew it, I was in the office of Babis Filadarlis, the owner (his card lists the titles of MBA, MIEx and DipM and his English is perfect). He had made a career with the official export promotion agency for Northern Greece before he started his own company in 2005. The company's mission is to help Greek businesses to increase exports.

Filadarlis is a consultant who charges consultants' fees for services rendered. Thus, companies which use his services know that it will cost them something from the start (as opposed to the public export promotion agency which is free of charge). And yet, Filadarlis claims that his small office gets more 'demand' from companies than the public export promotion agency.

Filadarlis says his greatest 'enemies' are the public export promotion agency because they think he is meddling in their business. The only thing is that when he organizes seminars (against fees), he gets 20 or more participants and when he organizes trade missions, he gets at least a dozen participants (a much better 'response' than the public export promotion agency). He is presently organizing a trade mission to Jordan. I queried what sort of companies would see a potential in the Jordanian market. He mentioned, among others, furniture makers. Now that surprised me because when we had to furnish our apartment, I got the impression that all furniture in Greece was imported.

Filadarlis says that the public export promotion agency (which he says is quite large) is primarily interested in itself; in its political influence and in its relations with the public sector. Whether or not Greek exports are increased as a result of their activities is of secondary importance to them.

Filadarlis belongs to those Greeks who say that Greece's greatest problem is the public sector. He thinks that total job security should be taken away from public sector employees and they should be made subject to performance criteria. I wished him good luck with that hope...

Another major problem, according to Filadarlis, is that the Greek mentality reinforces a lone-wolf-behavior. Everyone does his own thing; period. There is no pooling of resources in the effort to promote exports. There is no central effort to marshall resources effectively. Examples: every small olive farmer handles his own export promotion (if he does). Or, every tourist village would handle its own marketing without ever thinking of pooling resources with other villages.

I mentioned that McKinsey had published the report Greece Ten Years Ahead about 2 years ago and that it included many recommendations how to increase exports. Not only did Filadarlis know of that report; he pointed to the bookshelf behind his desk where he had the report filed.

Filadarlis showed me a beautiful tool which he has developed - "the export road map". It is a marvellous map-like guide for the most important and valuable sources of information on the internet for every potential exporter. He had sent 2.000 such maps to 56 chambers of commerce in Greece with the suggestion that they should forward them to their members. Only two of them did that.

Did I come away from the meeting with a positive feeling? Yes and no; but probably more like no. Why?

I was very positively surprised that there are Greek companies which consider exports important enough so that they would pay someone a fee to help them increase exports. I was also positively surprised that there would be capable people like Filadarlis who respond to that demand.

However, the hurdles which Filadarlis mentioned are somewhat mindboggling in the sense that they cannot easily be overcome. These hurdles relate to existing structures and to existing mentalities.

A public sector which means well for the public should jump on initiatives like Global Greece and do everything possible to promote them. When a public sector does the opposite, it becomes very difficult to still believe that the public sector means well for the public.

Saturday, April 13, 2013

On Sunday, the new German party 'Alternative für Deutschland' will have its first party congress. Its basic message is that there are always alternatives in life (as opposed to Chancellor Merkel's position so far that there are no alternatives to saving the Euro). Their basic position is that the Euro - as it is - is setting the peoples and nations of Europe against one another.

When looking around what is happening these days, one has to consider this party as a breath of fresh air. I mean, first, the Troika treats Cyprus like a pawn on a chessboard. Then, George Soros tells Germany to leave the Eurozone (if it does not accept Eurobonds). Then, a former Dutch EU Commissioner says that the Netherlands should leave the Eurozone. Just about every pundit in the world has identified Germany as the culprit. And to top it off, the Greeks consider it now as the proper time to claim from Germany the settlement of WW2 debts in 3-digit BEUR amounts.

The other side is beginning to show nerves. Hans-Ulrich Jörges, a famous commentator of "stern" magazine, considered a liberal leaning to the left, wrote the other day: "I have had it! Here I defend Europe all the time. I want the Euro. But I don't want to keep the Europe we have today at any price. I don't want to be called a Nazi any longer! I can't take it any longer that our Chancellor is taunted as the reincarnation of Adolf Hitler!"

The situation reminds me of a cartoon which was published in a Chilean paper as the war over the Falklands was beginning to unfold. The cartoon showed the Southern Atlantic where a British armada was steaming from the North and the Argentine armada was steaming from the South. And there was a stone-faced observer who said: "Either the home team will win or the visiting team, but there is not going to be a draw!"

The way things are developing in the EU and the Eurozone, it's getting harder and harder to envisage a fair draw as the result!

Tuesday, April 9, 2013

The car had gotten dirty during our 4-month absence, so I went to my favorite place to have it cleaned. The owner of the gas station, a cheerful 35-year old, seemed to be alone. I hesitated because I wanted the car cleaned well on the outside and inside and didn't know how he could get it done alone. He just signalled me that I shouldn't worry.

Then, as though they had received a secret signal, two or three people showed up out of nowhere and got busy around my car. The owner's sister showed up to run the cash register. The owner, the 'boss' so to speak, had time to sit down with me and chat. Every once in a while he got up to do some work on the car himself. It looked like there was an understanding with his people what kind of work only he, the boss, could do.

I spoke to the owner in my best (broken) Greek and he preferred to reply in his best (broken) German. Somehow we understood each other.

Without losing his cheerfulness, he told how this country was going down the drain. The only thing he had been doing last year was paying. Paying for this, paying for that and - of course - paying taxes. No money left for the family despite 12-hour working days. No perspective for the young generation. And those big shots still didn't pay any taxes.

He lit a cigarette and offered me one. I pointed to the sign above the fuel pumps which said 'no smoking'. He laughed, waiving his right hand in a spiral toward the sky. "This is Greece", he said, "you know, sun, sea, good food, bouzoukia, good life --- it's not about signs!" So I lit a cigarette, too.

A young, blonde lady drove up on a small motorcycle. Very cool appearance: tight jeans, fancy boots, cool jacket, sun glasses, etc. When it was filled up, she signalled with a move of her hand that she also wanted it washed. One of the people working on my car immediately got busy on her motorcycle. Meanwhile, the blonde was cheerfully talking on her mobile. I didn't hear the world 'Troika' once.

After about 1/2 hour my car was ready. I asked the owner what the cost was and he said 8 Euro. I hesitated for a moment because I thought that last year I had paid 15 Euro for that. Then I gave him 10 Euro and asked him to give the change to the fellows doing the work. He was happy.

And there it was. A 3-year old car looking brand new again, having just undergone the best cleaning treatment any car could dream of. And I had had a good half hour of cheerful conversation. And the sun came out after a rainy morning.

Friday, April 5, 2013

Readers of this blog may wonder why I keep repeating myself; why I tirelessly bring up the subject of the Cosco investment in Piraeus as the prototype of the foreign investment which Greece needs.

There is one reason why I do this: the topic is so utterly crucial for the future of the Greek economy. As this article from the Ekathimerini points out, the Cosco investment is one true success story and, by 2018, it is expected to contribute 2,5% to GDP.

By the way, another topic which I have focused on over and over again it the McKinsey report Greece Ten Years Ahead. For those who are not familiar with it: it recommended (2 years ago) how Greece could add about 50 BEUR to its GDP over the next 10 years by pursuing about 100 projects outlined in the report (and generate about 500.000 new jobs, too)!

The suggestion is often made that Greece is de facto, with the Euro, on a gold standard and that this is the major reason for the harsh austerity. If Greece had the Drachma as a local currency, the argument continues, then Greece could print the money it needed to pay more wages, salaries and pensions, and it could invest more. As a non-economist, I am not sure that I agree.

At year-end 2010, Greece had foreign debt of 404 BEUR (182 BEUR in the public and 222 BEUR in the private sector). More importantly, Greece had a trade deficit of 28 BEUR that year and a current account deficit of 23 BEUR. Those deficits could not have been financed with Drachma printed in Greece.

The more plausible argument is that if Greece had never joined the Eurozone, its foreign debt would not have stood at 404 BEUR at year-end 2010 because foreign creditors would not have lent a Drachma-Greece that much money. That, of course, is a question of guessing. I would only point out that non-Euro countries like Iceland or Hungary also received enormous foreign debt despite being on a local currency.

It is one thing to have foreign debt because foreign debt could, theoretically, be repudiated. It is quite another thing to have trade and current account deficits because that means the country continues to need new foreign debt in order to stay in business (alternatively, the country would have to radically curtail imports). If Greece had left the Eurozone at year-end 2010, it could have printed Drachma to pay wages, salaries and pensions but it could not have printed the currency required for the payment of imports.

Any country which hits external payment problems, even if it can print its own currency, will be confronted with some form of a gold standard if it needs new foreign funding to stay in business operationally. And the providers of new foreign funding (such as the IMF) will always impose some form of austerity on public expenditures as a condition for that new foreign funding.

Argentina is often cited as an example where giving foreign creditors the shaft worked for the benefit of the country. It had its own currency and could print it at its own pleasure and discretion. Yes, but this only worked because Argentina had surpluses in its external accounts. It generated new foreign funding out of it own operations; it didn't need it from creditors.

I fail to see how the Euro (as a sort of gold standard) was/is the cause of Greece's austerity. However, I think there are valid questions whether the Euro perhaps led to the type of austerity which Greece experienced in the last 3 years.

Had Greece left the Eurozone at year-end 2010, the new Drachma would have devalued immediately and significantly. The pain of presently 3 years of austerity might have become condensed into a few months: financial assets would have been devalued; many imports would have become unaffordably expensive. At the same time, Greece would have become 'cheaper' from one day to the next and it goes to suspect that economic activity would have picked up for that reason. The public sector might still have been subjected to stringent austerity by the Troika but the private sector would have picked up.

With the benefit of hindsight, I would say that the resulting austerity would have been easier to bear for the simple reason that it would have been fairer than the austerity we have seen so far. An adjustment via devaluation tends to hit everyone (or at least the majority) in more or less the same way. An adjustment via internal deflation hits those who are targeted by the government's measures.

Is the unfair adjustment via internal deflation working? I would suggest that we will find out this year. If there are 3 (or more) months with growth this year, I would consider this as an argument that the adjustment may be working. If there is only 1 month of growth (or none), I would conclude that it's about time to seriously consider alternatives.

Thursday, April 4, 2013

An anonymous reader (I take it he is a British with extensive living experience in, as well as good inside knowledge of Greece) made the following comment to an article published by Nick Malkoutzis in his bog: An April Fools Economy.

The
problem (in a nutshell) is as follows:

(1)
The Troika is concerned with the viability of northern European banks and the
integrity of advanced capitalism. Greece and others are an irritation.

(2)
The Troika “solutions” consist of austerity measures to cut expenditure and
(theoretically) raise state revenues, as an immediate cut on the cost of
financing the Greek and others’ budgetary deficits. However, the economists
know that this is short-term nonsense: so, they impose neoclassical reforms
(free market and privatisation crap) as the long-term structural solutions.

(3)
These long term measures have never worked anywhere, and there is not a cat’s
chance in Hell that they will do Greece any good. The problem for the IMF is
that they have no other ideas.

(4)
The Greek politicians’ solutions to everything always used to be: spend, spend
and spend. This had to end with a eurozone monetary policy, but they were too
thick to work it out. Now they know it, they don’t have a solution either.

(5)
So, in reality, neither the Troika nor the Greek state have a serious long-term
plan for structural reforms. Some of the ideas of the Troika’s economists know
in general terms what is needed, but they have no practical ideas for their
implementation and no political support anyway.

(6)
The current Greek government has a deluded idea that “everything will work out
in the end” so they just need to keep on bluffing and talking crap. Look at the
opinion polls: Samaras is doing well, despite being a moron who has achieved
nothing.

(7)
The bottom line is this: either Greece learns how to produce and market
sellable quality goods (including tourism) and compete in the global economy,
or it will fall into the abyss of Third World Economy. We are a quarter of the
way there already. No other country is going to save Greece; the EU cannot
provide inspiration and direction for Greece; the Germans cannot subsidise
production and sales. This innovation has to come from the Greek people — from
the intelligentsia (who don’t deserve the word) and the political idiots. I
don’t see much hope, with the partial exception of Tsipras and a few others.
Yet, they are disparaged (in the typical foolish Greek way) along the lines of
his age, lack of family prestige, educational profile, anti-left political
rhetoric…. in other words, Greeks continue to make the same mistakes as they
have made since 1832.

Very well formulated! Nevertheless, I am reminded of what my American bosses would have said in the early years of my career when I got used to American thinking. They would have said: "Great! Now have have defined the problem. What are you offering by way of solutions?"

Of course, the solution is that 'Greece learns how to produce and market
sellable quality goods (including tourism) and compete in the global economy'. But where is the button one needs to push in order to get that result?

The technocrats are saying that all that is required is to get government expenses under control, implement reforms to liberalize the economy and - just wait to see how miracles will happen. And my response is: those miracles will not happen all by themselves. Why? Because a system which has developed in the wrong direction for years, perhaps even decades, will not change simply because a button is pushed; simply because the economy is liberalized. That will only happen if there is a sustained change management process.

I repeat my age-old thesis: the best change management process involves foreign investment. People don't change their habits, mentalities and ways of professional life simply because someone says they should. People change their habits, mentalities and ways of professional life when they see better habits, mentalities and ways of professional life. To see better habits, mentalities and ways of professional life is the only effective instrument in the process of change management.

Greece needs foreign investment for two reasons. First, because, from a Balance of Payments perspective, the Greek economy needs foreign funding in order to employ its people and foreign investment is by far a better source of foreign funding than interest bearing and repayable debt. And, secondly - and this may even be the more important reason - because foreign investment brings with it the transfer of know-how in all areas: technological know-how for sure but also know-how in areas like professional management, good corporate governance and good corporate culture.

Wednesday, April 3, 2013

David Stockman, US Budget Director during the Reagan presidency, caused more than a stir with his article titled "State-wrecked: the corruption of capitalism in America". It is a full-fledged attack on the Fed's loose monetary policies, an expanding social safety net, bank
bailouts, misguided Keynesianism, and the large budget deficit. Not being an economist, I cannot comment on that with substance but I do note that, within 24 hours, six noted economists took down Stockman's article with economists' arguments. Prof. Krugman called it 'cranky old man stuff'.

There is another piece of information published by Mr. Stockman recently. Since it involves banks, I understand it a lot better. Below is the text:

The
real story of the present is the shadow banking system, the unstable and
massive repo market, and the apparent daisy chain of hyper-rehypothecated
collateral. It looks like the sound bite version amounts to the fact that the
European banking system is on the leading edge of collapse for the whole
system. These institutions are by all evidence now badly deficient of the three
hallmarks of real banks—deposits, capital and collateral.

BNP-Paribas
is the classic example: $2.5 trillion of asset footings vs. $80 billion of
tangible common equity (TCE) or 31X leverage; it has only $730 billion of
deposits or just 29% of its asset footings compared to about 50% at big U.S.
banks like JPM; is teetering on $500 billion of mostly unsecured long-term debt
that will have to be rolled at higher and higher rates; and all the rest of its
funding is from the wholesale money market , which is fast drying up, and from
repo where it is obviously running out of collateral.

Looked
at another way, the three big French banks have combined footings of about $6
trillion compared to France’s GDP of $2.2 trillion. So the Big Three french
banks are 3X their dirigisme-ridden GDP.Good luck with that!No wonder
Sarkozy is retreating on France’s AAA and was trying so hard to get Euro
bonds.He already knows he is going to
be the French Nixon, and be forced to nationalize the French banks in order to
save his re-election.

By
contrast, the top three U.S. banks which are no paragon of financial
virtue—JPM, BAC, and C—have combined footings of $6 trillion or 40% of
GDP.The French equivalent of that
number would be $45 trillion for the U.S. banks.Can you say train wreck!

It
is only a matter of time before these French and other European banks, which
are stuffed with sovereign debt backed by no capital due to the zero risk
weighting of the Basel lunacy, topple into the abyss of the shadow banking
system where they have funded their elephantine balance sheets. And that
includes Germany, too. The German banks are as bad or worse than the French.
Did you know that Deutsche Bank is levered 60:1 on a TCE/assets basis, and that
its Basel “risk-weighted” assets are only $450 billion, but actual balance
sheet assets are $3 trillion? In other words, due to the Basel standards, which
count sovereign and other AAA assets as risk free, DB has $2.5 trillion of
assets with zero capital backing!

This
is all a product of the deformation of central banking and monetary policy over
the last four decades and the destruction of honest capital markets by the
monetary central planners who run the printing presses. Furthermore, this has
fostered monumental fiscal profligacy among politicians who have been told for
years now that the carry cost of public debt is negligible and that there would
always be a central bank bid for government paper. Perhaps we are now hearing
the sound of some chickens coming home to roost.

I have made similar arguments about the large European banks before. Stockman cites Deutsche's leverage at 60:1; I calculated it on the basis of the latest annual financial statements at 40:1. Either way, it is far, far too high for a bank which does not view itself as a highly leveraged hedge fund.

The capital adequacy ratios stipulated by Basel-2 certainly serve a purpose but the one purpose they DO NOT serve is containing the size of a bank. The only way to contain the size of a bank is to contain leverage (total liabilities in relation to equity). In fact, leverage used the be the primary size control instrument in the US until not too long ago. Similarly, leverage is one of the most important factors in assessing the credit risk of corporations.

Back in the 1970s, there were 9 socalled 'money center banks' in the US. The name derived from the fact that were heavily financed with interbank funds. By law, most of those banks could not have branches and thus had only limited ability to attract deposits. Continental Bank of Chicago had the highest ratio of interbank funding in relation to total funding with about 80% (i. e. 80% of its funding consisted of money purchased in the interbank market with average tenors of not much longer than 30 days!). Even at Bank of America which did have a couple of thousand branches in California, that ratio was still 60%.

The banks' leverage was about 20:1. Until the failure of Continental Bank of Chicago in 1984, neither the interbank funding nor the high leverage had been much of an issue. Then it became an issue. Today, JP Morgan and Citibank have leverages of about 10:1.

High leverage entails several important risks. First, total assets reach unduly high levels and, thus, increase the credit risk of the bank. As importantly, the total funding requirement reaches unduly high levels and there it increases the funding risk. When markets get nervous, they could quickly become very nervous about interbank funding of the highly leveraged banks.

On a Saturday in the spring of 1984, the host of The McLaughlin Group, a widely watched talk show, made a comment like 'I know that there are only two things which Paul Volcker (Fed Chairman) is worrying about. One, that a Latin country like Argentina could default. And, two, that one of our money center banks, say the Continental Bank, could fail'.

A Japanese journalist, after watching the show, telexed to his Head Office that, according to rumors, Continental Bank had filed for Chapter 11. Monday morning, everyone looked anxiously at Tokyo to see what the Japanese banks would do. They called their loans to the Tokyo Branch of Continental Bank. The sun went West and a few hours later, all eyes were on the German banks and, particularly, on Deutsche. It was thumbs down. They all called their loans to the Frankfurt branch of Continental Bank. By the time New York opened, it was clear that the game was over for a bank which had just celebrated its 125th anniversary and which had been voted the 'Best managed bank of the 1970s'. Within less than 24 hours, the bank had lost one-third of its funding.